UPDATE 2-Iraq says Kurd oil deals illegal, Kurds foot bill

* Iraq reaffirms Kurdish oil deals illegal

* Rejects paying private oil firms in Kurdish deals

* Confirms winners of oil bids to be announced end of June

(Adds byline, quotes)

By Ahmed Rasheed

BAGHDAD, June 10 (Reuters) - Contracts that semi-autonomous
Kurdish authorities have signed with private oil firms are
illegal until they are ratified by the Oil Ministry in Baghdad,
the Iraqi government reaffirmed on Wednesday.

Oil Minister Hussain al-Shahristani also rejected paying
firms that have developed the Taq Taq and Tawke oil fields in
northern Iraq as part of contracts signed independently with the
Kurdish Regional Government (KRG).

"These contracts need to be ratified by the Iraqi federal
Oil Ministry. Till that time they are illegal," government
spokesman Ali al-Dabbagh told reporters at a news conference
with Oil Minister Hussain al-Shahristani.

After the conference, Shahristani told reporters: "We will
not discuss any compensation for these companies (developers of
Taq Taq and Tawke) under any circumstances."

His statement could ratchet up tensions between Baghdad and
the KRG, which has said it would not pay Norway's DNO
International (DNO.OL), Toronto-listed Addax Petroleum AXC.TO
and Turkey's Genel Enerji, from its own purse. Genel is to merge
with Britain's Heritage Oil HOIL.L.

Shahristani said the KRG should pay the firms from the 17
percent of the federal budget it gets each year, an option ruled
out by Kurdish natural resources minister Ashti Hawrami.

The Iraqi government at the beginning of the month allowed
crude to start being exported from Tawke and Taq Taq.

That seemed to represent a break in a long-running dispute
between the Shi'ite Arab-led government in Baghdad and minority
Kurds over land, power and Iraq's vast oil resources.

KURDISH DEALS UNRESOLVED

But while giving a nod to exports, Baghdad still refused to
recognise the actual development contracts signed with the
firms, making it unclear how DNO and the others would be paid.

The central government says all oil deals must be approved
by the Oil Ministry and opposes the production sharing
agreements favoured by the Kurds. Instead, Baghdad at the end of
this month will announce the results of its first tender for
fixed-fee service contracts in some of its prized oil fields.

Some lie near the disputed city of Kirkuk, contested by
Kurds, Arabs and ethnic Turkmen. Hawrami has said the KRG would
reject any deals for those fields if it did not like the terms.

"No one has the right to veto the decisions of the central
government, whether those are decisions about oil or about
anything else," Shahristani retorted on Wednesday.

Shahristani has defended his record against criticism that
Iraq's oil output of 2.3-2.4 million barrels per day remains at
below the level it was at before the 2003 U.S.-led invasion.

He faces calls to testify before parliament.

The joint news conference with Dabbagh appeared to be a
signal that the government intended to stand by Shahristani as
he prepares to announce the results of the first round of
service contract tenders over two days on June 29/30.

Dabbagh said he hoped new oil and gas laws -- held up in
parliament -- will resolve the issue of oil deals.

In a conciliatory tone that suggested the government's
stance could be softening despite its rhetoric, Dabbagh also
said the launch of Kurdish crude exports was good for Iraq,
which desperately needs money to rebuild after years of war.

"It will narrow the gaps between the different points of
views," he said.
(Additional reporting by Mohammed Abbas; Editing by Keiron
Henderson)